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The New York State Department of Taxation and Finance (the Department) recently released an advisory opinion analyzing the proper characterization and sourcing of various revenue streams derived from the facilitation of online trading activities. Petition No. C080222A, TSB-A-11(8)C (July 12, 2011).  Relying on our old friends, Deloitte & Touche, LLP, TSB-A-02(3)C (Apr. 18, 2002); Ins. Servs. Offices, Inc., TSB-A-99(16)C (Apr. 7, 1999); and New York Merchantile Exch., TSB-A-00(15)C (Apr. 18, 2002), the opinion represents the Department’s growing trend to expand the category of “other business receipts,” to source receipts on a market rather than on a cost-of-performance basis.

In the opinion, the Parent is a Delaware corporation headquartered in New York. It owns and operates an Internet-based platform (Exchange) that serves as a marketplace for over-the-counter (OTC) global futures markets. Although the Parent is not a registered broker-dealer, the Exchange serves as a marketplace for buyers and sellers of certain commodities contracts, financial contracts, and other derivatives contracts in futures and OTCs to meet and execute trades on a real-time basis. All of the Parent’s property and equipment associated with the Exchange is located outside of New York, and all of the clearing administration for the OTC is performed outside of New York. In addition to the Parent’s activities, its affiliates generate receipts from various transactions, including open outcry trading, digital auction, flat monthly subscriptions, and trades executed with the assistance of interdealer brokers.Continue Reading The Big Apple Goes to the Market for Online Trading Revenue

Companies that provide financing to customers in Texas to purchase and lease equipment may be shocked to learn that their interest expense may not be deductible as a cost of goods sold (“COGS”). In Texas, a “lending institution” that offers loans to the public is authorized to subtract an amount equal to their interest expense as COGS. Tex. Tax Code Ann. § 171.1012(k) . However, it is unclear what the phrase “loans to the public” means.

A recently released Policy Letter Ruling did little to clarify this, and only muddied the waters further regarding what “loans to the public” means when a multi-state financial services company provides loans for the purchase or lease of a related affiliate’s equipment. The ruling denied the deduction of interest expense as a COGS to a wholly-owned finance subsidiary that qualified as a “lending institution” and was engaged in the business of financing heavy construction equipment sold or leased by its parent company to unrelated third-party customers. Tex. Pol. Ltr. Rul. No. 201101133L (Jan. 6, 2011) (released July 2011). A qualifying “lending institution” includes an entity that makes loans and is regulated by a federal regulatory authority, the Texas Department of Banking, Office of Consumer Credit, Credit Union Department, Department of Savings and Mortgage Lending. Tex. Tax Code Ann. § 171.0001(10).Continue Reading “Loan” Star Mishap: Texas Muddies Water on Interest Expense Deduction for “Loans to the Public”

The Michigan Supreme Court recently reversed an odd Michigan Court of Appeals decision, which held that an out-of-state securities broker-dealer had nexus sufficient to subject it to the Single Business Tax (SBT) by virtue of the activities of in-state, independent registered representatives who contracted with the broker-dealer to facilitate trades for the representatives’ customers on out-of-state security exchanges. Vestax Sec. Corp. v. Dep’t of Treasury, 2011 Mich. LEXIS 945 (June 1, 2011), rev’g, 2010 Mich. App. LEXIS 2093 (Oct. 28, 2010).   

Vestax Securities Corporation, an out-of-state securities broker-dealer company, had contractual relationships with independent registered representatives who used Vestax to facilitate securities transactions. These independent representatives had in-state customers who would request a securities trade from the representative, and the representative, in turn, would rely on Vestax to execute the transaction on a national securities exchange outside of Michigan.Continue Reading Broker-Dealer Dodges Michigan Nexus

After nearly 60 years of experimentation with value added and gross receipts taxes, Michigan has now joined the rank-and-file corporate income tax states through its repeal of the Michigan Business Tax (MBT). Governor Snyder signed the tax package (H.B. 4361, H.B. 4362) into law on May 25, 2011. According to the Council on State Taxation, the legislation takes the state from 30th to 16th in the nation in terms of lowest state and local business tax burden.

The new 6% corporate income tax, effective January 1, 2012, retains many of the same features as the Business Income Tax component of the former MBT, including unitary combined reporting, single sales factor apportionment with market sourcing, a Finnigan apportionment rule, and the same tax rate. The MBT factor presence nexus standard is also retained, under which nexus is established if an out-of-state company has physical presence in Michigan for more than one day or actively solicits sales in the state and has Michigan gross receipts of $350,000 or more. The new tax also incorporates the same tax regimes for insurance companies and financial institutions that existed under the MBT. Insurance companies continue to be subject to the greater of a 1.25% tax on gross direct Michigan premiums or the retaliatory tax, and financial institutions will still be subject to tax based on 0.29% of net capital.Continue Reading Michigan’s Tax Roulette Lands on a Corporate Income Tax

The New York Tax Appeals Tribunal (TAT) affirmed a decision forcing the combination of a banking corporation and its “nontaxpayer” subsidiary. The combination was upheld based upon the existence of an interest deduction—taken by the banking corporation and attributable to assets held by its subsidiary—that created distortion of income. Interaudi Bank F/K/A Bank Audi (USA), DTA No. 821659 (Apr. 14,  2011).

Interaudi Bank (Interaudi), a commercial banking corporation organized and chartered in New York, formed and transferred its investment portfolio to an investment holding subsidiary, BA (USA) Investments Inc., (BA Investments) domiciled in Delaware. BA Investments limited its activities to the management and maintenance of marketable securities. During the 1997-1999 period, Interaudi filed a New York Article 32 (Bank Tax) combined return that included all of its subsidiaries, except BA Investments—which did not file a New York tax return. Interaudi then claimed interest expense deductions paid to BA Investments.Continue Reading Distortion Reigns in New York Article 32 Forced Combination Case

The Multistate Tax Commission (MTC) is in the midst of two projects that focus on the financial services industry. The first project is an effort to amend the recommended formula for the apportionment and allocation of the net income of financial institutions, first adopted by the MTC in 1994. The second project, referred to as the “non-income taxpayer project,” involves the MTC’s drafting of a model statute that would subject certain partnerships and other pass-through entities to an entity level state income tax to the extent their income passes through to an entity that is not itself subject to the state’s income tax.Continue Reading The Multistate Tax Commission Restructures Apportionment of Financials, Seeks to Tax Pass-Throughs

On January 10, 2011, the New Jersey Division of Taxation (the Division) started the new year off with a bang by issuing a Technical Advisory Memorandum (TAM), TAM-6 (Jan. 10, 2011) regarding the Division’s Corporate Business Tax (CBT) nexus policy. The issuance of this TAM sent both overt and subliminal messages to foreign corporations, particularly financial institutions.  

The Division advised that for privilege periods and taxable years beginning on or after January 1, 2002, amendments to the CBT made it clear that foreign corporations are subject to the CBT “for the privilege of deriving receipts from sources within this state, or for the privilege of engaging in contacts within this state.” N.J. Stat. Ann. § 54:10A-2. In addition, the Division adopted the holding of Tax Comm’r of W.Va. v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.Va. 2006), cert. denied sub nom FIA Card Services, N.A. v. Tax Commissioner of W.Va., 127 S. Ct. 2997 (2007), as the constitutional standard by which New Jersey’s nexus statute would be measured. Based on this foundation, the Division set stated: “taxpayers performing services and domiciled outside the State that solicit business within the state or derive receipts from sources within the State must file a [CBT] return” (emphasis added). The Division expressly targeted this nexus policy at financial institutions by stating that “a [financial institution] that has its commercial domicile in another state [is] subject to tax in this State if during any year it obtains or solicits business or receives gross receipts from sources within this state.”Continue Reading New Jersey’s “Situation”: Economic Nexus and Endless Possibilities

The New York State Department of Taxation and Finance issued an advisory opinion regarding whether three different financial advice services are subject to New York sales and use tax. Section 1105(c)(1) of the New York Tax Law imposes sales tax on receipts from the “furnishing of information” by printed matter, including the collection, compilation, or analysis of information of any kind or nature and furnishing reports on the same. However, the statute excludes from the scope of “furnishing of information”: 

  1. Information that is personal or individual in nature; and 
  2. Information that is not or may not be substantially incorporated into reports furnished to others.

New York courts have further qualified the first criterion by requiring that an information service be “uniquely” personal or individual in nature.Continue Reading New York Issues (Another) Advisory Opinion on Taxability of Financial Advice Services

When is an insurance company “subject to” premium tax? Recently, the Indiana Tax Court answered this question in United Parcel Service, Inc. v. Indiana Department of Revenue, 49T10-0704-TA-24 (December 29, 2010), concluding that an insurance company is “subject to” premium tax when it is placed under the authority, dominion, control, or influence of the tax, and not simply when it is required to pay the tax. 

In United Parcel Service, the Indiana Department of Revenue had determined that UPS should have included the income of two affiliated foreign reinsurance companies in its Indiana worldwide unitary corporation income tax return. UPS, however, maintained that its affiliated foreign reinsurance companies should be excluded because the Indiana statutes provided that there is no income tax on the adjusted gross income of insurance companies “subject to” the Indiana gross premium tax.Continue Reading Inclusion of Insurance Company in Unitary Return – When Is an Insurance Company “Subject to” Premium Tax?

The Utah State Tax Commission has amended its rules for apportioning financial institution receipts attributable to services from a costs-of-performance sourcing rule to a market-based sourcing rule (Utah Admin. R. R865-6F-32(3)(l)). Effective December 9, 2010, financial institutions must include in the sales factor numerator receipts from services not otherwise specifically addressed in the regulation “if the purchaser of the services receives a greater benefit of the services in Utah than in any other state.” 

The change in sourcing methodology is consistent with Utah’s recently amended general corporation apportionment statute, Utah Code Ann. § 59-7-319, which similarly provides for the market sourcing of services (based on where the purchaser receives a greater benefit of the service). The change to market sourcing for financial institutions is another departure by Utah from the Multistate Tax Commission’s (MTC) model regulations for the apportionment of financial institution income. Continue Reading Utah Goes Market for Sourcing of Financial Institution Services